PEER COMPANIES

MUMBAI: Public sector banks were the worst hit on the bourses after the Reserve Bank of India maintained its neutral policy stance and raised inflation target for the second half of the current fiscal in its monetary policy. The Nifty PSU Bank index on Wednesday slid 2% to close at 3,751.75, its lowest level since October 24.

The Nifty PSU Bank index was the worst performer among NSE sector indices. The Bank Nifty index fell 1.1% to end at 24851.80, close to its day’s low. For the current year, Nifty PSU Bank index is up close to 26% and Bank Nifty index is up nearly 37%.

“The tone was hawkish, which was reflected in the negative reaction in PSU banks,” said Dhananjay Sinha, Head of Research, Economist and Strategist at Emkay Global Financial Services.

Amit Khurana, head of research at Dolat Capital said there is a realisation that rate cuts are probably out of question now.

In fact, several market participants said a rate hike is a now a possibility next year as the US Federal Reserve readies to tighten its monetary policy.

“RBI has again flagged off inflation risks and this is the second time in a row that they have raised their inflation forecast for H2. Going by the inflation prints, and the tone of the policy, it seems the RBI may remain on an extended pause. Importantly, rate hike has entered the realm of probability, however distant, which was not the case earlier,” said Sachchidanand Shukla, chief economist, Mahindra & Mahindra Group.

Public sector banks are expected to be most impacted by rate hike as these lenders still have unresolved bad debt problems and a sizeable government bond portfolio book.

Khurana said that except SBI, Bank of Baroda and to some extent, Punjab National Bank, other public sector lenders may continue to have balance sheet issues and their ability to gain market share could be constrained.